2013 (1) TMI 39 - HC - Income Tax

Depreciation - Capital subsidy Commissioning of Power Plant Explanation 10 to Section 43(1) Whether subsidy received by assessee directly or indirectly from Central Government or a State Government is reduced from actual cost of asset for the purpose of calculation of depreciation - Treatment of subsidy from cost of assets for calculating depreciation - Assessee is engaged in manufacturing sugar ethanol rectified spirit and co-generation of power - Assessee has received the subsidy from the Government of Karnataka for commissioning co-generation plant Held that - Yes According to Explanation 10 and proviso to sub-section (1) of Section 43 the subsidy amount shall be deducted in the actual cost of the asset of the assessee. The contention of the assessee that the subsidy received towards the Generation Plant shall not be reduced from the actual cost of the assets is not correct. In favour of revenue

Summary

Issues:
- Appeal against common order dated 2.12.2010 made in ITA Nos.130 and 131/Panaji/2009 on the file of Income Tax Appellate Tribunal (ITAT), Panaji Bench at Panaji.
- Dispute over the treatment of subsidy received from the Government for commissioning Co-Generation Power Plant.
- Interpretation of Explanation 10 to Section 43(1) of the Income Tax Act, 1961.
- Application of principles from previous court decisions to the current case.

Analysis:

1. Facts of the Case:
The Respondent, engaged in manufacturing sugar, ethanol, rectified spirit, and power generation, filed income tax returns for the years 2001-02 and 2006-07. The dispute arose regarding the treatment of subsidies received from the Government of Karnataka in the calculation of income and depreciation.

2. Legal Dispute:
The Revenue filed appeals challenging the order of the Income Tax Appellate Tribunal (ITAT) that disallowed the reduction of subsidy from the cost of assets for depreciation calculation. The key legal issues revolved around the interpretation of Explanation 10 to Section 43(1) of the Income Tax Act, 1961.

3. Substantial Questions of Law:
The Revenue raised substantial questions regarding the applicability of Explanation 10, the relevance of previous court decisions, and the correct treatment of subsidies in asset cost calculation for depreciation purposes.

4. Interpretation of Explanation 10:
Explanation 10 of Section 43(1) states that if an asset's cost is subsidized by the government, the subsidized amount should not be included in the actual cost of the asset for the taxpayer. The provision clarifies the treatment of subsidies in asset valuation for tax purposes.

5. Court Decision:
The Court held that the subsidy received for commissioning the Co-Generation Power Plant should be reduced from the cost of assets for depreciation calculation. Referring to a previous judgment, the Court emphasized that the subsidy granted by the government must be deducted from the asset cost for depreciation calculation.

6. Conclusion:
The Court answered all substantial questions of law in favor of the Revenue, allowing the appeals against the ITAT's order. The decision clarified the correct treatment of subsidies in asset valuation and depreciation calculations under Explanation 10 of the Income Tax Act, 1961.